Mandatory public float requirements: Have they done more harm than good?

4 November 2015 02:39 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe

Four companies on the Colombo Stock Exchange (CSE) have already  delisted and several more are considering taking the same route following the introduction of the new listing rules to promote a more vibrant and liquid market.

Beruwela Walk Inn, Kuruwita Textile Mills and Asiri Central Hospitals delisted in 2014, and NDB Capital Holdings delisted this year. Carson Cumberbatch PLC (Carson) this week announced that it would be delisting its subsidiary Equity One PLC, while Carson’s latest annual report said that its 4 plantation subsidiaries—Indo Malay PLC, Shalimar (Malay) PLC, Good Hope PLC and Selinsing PLC—will inevitably be delisted. The five Carson companies represent 1.79 percent of CSE’s market capitalization. Meanwhile, Finlays Colombo PLC recently announced that it would be delisting.   Cargills group sometime back also announced that its subsidiary Kotmale Holdings PLC would be delisted, and the trading of the Kotmale shares has been suspended since January.

While Beruwela Walk Inn and Kuruwita Textile Mills delisted citing their unprofitability, most other companies are delisting due to their parent companies being unwilling to divest their holdings in the entities. Meanwhile, Carsons demoted its Equity Two PLC and Pegasus Hotels of Ceylon PLC to the secondary Diri Savi Board, which has more lenient public float requirement, while Finlay’s transferred its Hapugastenne Plantations 
PLC to the secondary board as well.

Mirror Business learns that several other companies are considering delisting or getting them transferred to the secondary Diri Savi Board, calling to question the effectiveness of the rules.

Meanwhile, seven companies had gone for an Initial Public Offerings (IPOs) since the introduction of the rules, but all of them are in the secondary board.
The Securities Exchange Commission (SEC) had brought in the rules on minimum public holding as a continuous listing requirement on January 2014.

The rules rationalize that a sizable public holding is necessary for a transparent and liquid market with less potential for abuse, with better price discovery and allow more Sri Lankans to partake in wealth generated from the listed entities.

According to the rules, main board companies should have a 20 percent public float among 750 shareholders or a 10 percent public float representing Rs.5 billion market capitalization spread among 500 shareholders while secondary board companies should have a 10 percent public float among 500 shareholders.

Entities had been required to follow the rules within 30 days, failing which all non-compliant companies had been required to announce their non-compliance, which had given them automatic exemptions till December 2014.

Companies which could not comply within this time period had the option of requesting a second extension of the grace period until December 2016 depending on SEC discretion, during which they had to follow partial compliance of the rules, which most companies had opted for.

However, all companies are required to follow the public float guidelines by December 2016.

Interestingly, the rules do not apply to companies which are state-controlled. 

At the same time, no controlling shareholder of a main board company has divested their holdings to comply with the 20 percent public float rule. Instead, they were seen demoting their companies to the secondary board by divesting a lesser amount of shares.

A senior SEC source said that the regulator will decide whether exemptions or extensions to the rules will be given in December 2016.

According to the source, multi-national corporations will have to follow the Rs.5 billion capitalization of public float even if they are not compliant with the 20 percent public shareholding.
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